Q3FY24 Review: L&T Finance Holding: Retailisation on track, rising share of unsecured loans a monitorable

25 Jan 2024 , 12:08 PM

LTFH is fast executing on its retailisation strategy with the company likely to become a 100% retail lender by FY25. While retail loan book is scaling up, it is primarily led by unsecured loans (MFI, 2W, PL) with its share increasing 520bps over the last two years to ~55%. While profitability is improving in tandem with rising retail mix, analysts of IIFL Capital Services expect ROEs to be constrained due to excess capitalisation. Rising share of unsecured loans and declining collection efficiencies in 2W and PL YoY are a monitorable for us, givens 35% of PL is being sourced through e-aggregators (ATS: Rs172k). Retain ADD with TP of Rs170, implying 1.7x FY25 P/B for ~14% ROEs. 

Inline results: 

LTFH PBT of Rs8.2bn was in-line with analysts of IIFL Capital Services expectations, growing by 3.3% QoQ (+36% YoY) with lower effective tax rate driving net income beat of 4%. Calculated NIM expansion of 35bps QoQ (chan gin g book mix) was 20bps lower than analysts of IIFL Capital Services expectations due to rising COF. This was offset by stronger fee income adj. for benefit of lumpy insurance fee income in previous quarter. Retail Stage 3 declined 10bps QoQ due to write offs (2.2%) even as net slippages inched up by 40bps QoQ to 2.7%. With the 2W and PL book seasoning, collection efficiencies were 20-110bps lower YoY. 

Profitability improving; excess capitalisation constraining ROEs: 

LTFH’s reported NIMs and ROAs are improving QoQ with increasing mix of retail loans (91% now). Analysts of IIFL Capital Services expect this trend to continue even as COF rises by ~10-12bps near term. With the company achieving its FY26 targets two years in advance, it now intends to improve consol ROAs to retail ROAs of 2.8%-3% by FY26 (from 2.5% currently). However, analysts of IIFL Capital Services note that consol ROEs at 11.4% are constrained by excess capitalisation. Analysts of IIFL Capital Services expect LTFH to deliver 14% ROEs by FY26. 

Retain ADD with TP of Rs170: 

Analysts of IIFL Capital Services tweak their estimates by 0-3% for FY24-FY26 and retain their ADD rating with TP of Rs170, implying 1.7x FY25 P/B for 2.8%/ 14% ROA / ROEs in FY26.